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Analysis

TRANSIENT OCCUPANCY TAX (TOT) SUBSIDY

Background

Anaheim hotels charge guests a 15% Transient Occupancy Tax (TOT) – the highest percentage in Orange County. Revenue from the TOT tax accounts for 44.7% of all Anaheim tax revenue. But the city council has voted consistently to grant rebates on the TOT to what it calls “four diamond” hotels to encourage economic development. The luxury hoteliers receive a 70% rebate on the TOT.

-Matt Smith

Current Issue, 2016

Disneyland unveils a plan to build a new luxury hotel. That same week, Disneyland requests that the city of Anaheim file their new hotel under the TOT subsidy given to other luxury hoteliers. The estimated cost of this subsidy is upwards of $200 million. This number could rise depending on the room rate and hotel construction costs. Ultimately, Disneyland would receive a 70% rebate on all TOT taxes over the next 20 years. If approved, this subsidy would be the largest in Anaheimhistory. This issue is expected to be voted on in July 2016.

-Matt Smith

History

2009

The Anaheim City Council, by a 3-1vote, approved a $76.3 million “bed tax” subsidy for two new proposed GardenWalk hotels. The developers, Bill O’Connell and Ajesh Patel, were given this subsidy based on the fact that the proposed hotels were considered “four diamond.” City Council members, including former Mayor Curt Pringle, Harry Sidhu, and Robert Hernandez voted for, while Lorrie Galloway voted against. Councilwoman Lucille Kring abstained from the vote. However, as the cost of development increased, O’Connell and Patel sought a higher subsidy.

-Matt Smith

2012

The City Council voted on whether to increase the subsidy for the GardenWalk development based on the rising construction costs. By a 3-2 vote, the Council approved nearly doubling the subsidy to $158 million over the next 15 years. Kris Murray, Gail Eastman, and Harry Sidhu voted in favor of the measure, while Mayor Tom Tait and Lorrie Galloway voted against. However, shortly after the vote a Superior Court ruled the vote invalid. This ruling was based on the fact that the public did not receive proper information about the measure before it was voted on. The original vote was on an 80% subsidy given out over 15 years.

-Matt Smith

2013

In a re-vote, the City Council once againvoted to more than double the subsidy for the GardenWalk properties. However, the new vote brought the subsidy down to 70%, but increased the time period to 20 years. The Council voted 4-1 to approve the new $158 million subsidy for the two proposed properties. Mayor Tom Tait was the lone dissenter, with Lucille Kring, Kris Murray, Jordan Brandman, and James Vanderbilt voting in favor of the measure.

The Anaheim City Council voted to approve the Disneyland Gate-Tax Ban in July 2015, extending a ban on taxes on admission the park. Councilwoman Kris Murray led the 3-2 majority in favor of the gate-tax ban, arguing that it would spur economic growth. Along with Jordan Brandman and Lucille Kring. Murray voted for the gate-tax ban. Mayor Tom Tait and James Vanderbilt voted against. Under this legislation, Disneyland is exempt from all ticket taxes in exchange for the company’s promise to invest $1 billion in the park over the next 30 years. For 15 years after, Disneyland remains exempt from a tax on tickets in exchange for an additional $500 million park investment.

-Matt Smith

Ultimately, the gate-tax ban bars voters from levying a tax on Disneyland tickets for the next 45 years. The deal makes the park unique among all other Anaheim businesses – the only business granted a waiver on admissions fees.

-Matt Smith

Mayor Tait argued that the gate-tax ban “ties the hands” of the voters even if Anaheim hits hard times. In addition, there was nothing to indicate that Disneyland wasn’t already seeking to expand. In order to compete with Universal and its recently opened World of Harry Potter, park improvements were nearly inevitable. This deal was ultimately a win-win for Disneyland.

Short-term rentals have become more popular, thanks in part to the rise of such shared-economy platforms as Airbnb, HomeAway and VRBO. With new popularity has come some controversy, as in Anaheim where long-term residents complain the short-term rentals have become a nuisance.

-Ethan Musser

Proponents of the industry argue that STRs provide supplemental income to middle-class homeowners, providing them with new sources of income. Other supporters say the incentive to offer short-term rentals leads to upgrades in homes and general improvement in neighborhoods.

One could argue that the real crux of the problem is that already existing regulation is not enforced. For instance, the complaints are largely about late-night noise and trash. Anaheim already has ordinances prohibiting littering and excessive noise from 10 p.m. to 7 a.m. If these ordinances were enforced, it seems the vast majority of issues residents have with STRs would be eliminated.

-Ethan Musser

In a city looking to regulate STRs, one might expect pressure for regulation of other engines of the sharing economy. However, unlike New York and Austin, Anaheim officials have been largely supportive of ride-sharing services Uber and Lyft, and other sharing services.

-Ethan Musser

HISTORY OF STRs IN ANAHEIM

On April 12, 2016, the Anaheim City Council voted unanimously to extend a moratorium under which no new short-term rental (STR) will be accepted until May 3, 2017.

-Ethan Musser

The moratorium was first passed on September 15, 2015 by a vote of 4-1 with Mayor Tait and Council Members Kring, Murray and Vanderbilt in favor. Council Member Brandman was the only vote against. However, Brandman noted that he did not oppose the moratorium, but he thought that more time should be given for stakeholders to meet with staff. He then moved to postpone action on this item until the October 6 meeting. He and Council Member Murray were the only two in favor of postponing action, and this motion failed. Then on October 20, 2015, the Council voted unanimously to extend the moratorium for six months.

-Ethan Musser

When the Council again voted on April 12, 2016 unanimously to extend the moratorium to May 3, 2017, they did so in the presence of crowds of Anaheim residents – some advocating a complete ban on STRs in residential neighborhoods. A few STR owners spoke in favor of allowing STRs to operate in compliance with city regulation. One owner noted that Orlando has over 7000 STRs and it has found a way for the sharing economy to peacefully coincide with permanent residents. In Orlando, the zoning is complex, and certain areas are approved for STRs, while others are not. In addition, communities must approve of STRs in order for them to be allowed in the area. This might be a model that could succeed in Anaheim.

Anaheim’s citywide budget is comprised of many different sources of funding. Most of these sources, including federal and state grants, are restricted; they can only be used for specified purposes. Other sources, including local taxes, are unrestricted; they can be used for any purpose. The citywide budget totaled $1667.4 million in fiscal year 2015/2016.

The most important use of Anaheim’s unrestricted funds is to finance the General Fund—the main operating fund of the city. The General Fund is used to fund “major city services such as Police, Fire, Parks and Libraries.” The General Fund had revenues totaling $286.2 million and expenditures totaling $286.0 million in fiscal year 2015/2016. Revenues came from “transient occupancy taxes (TOT), sales and use taxes, property taxes, fees, permits and other charges, and a host of miscellaneous revenue.” Expenditures were focused on Police and Fire, public utilities and public works, community and economic development, city administration, and human resources.

-Blake Dixon

The main source of revenue for Anaheim’s General Fund is the TOT. In fiscal year 2015/2016, the TOT accounted for $133 million, or about 46.5%, of the General Fund. The next largest source of revenue is the sales tax, accounting for $77.2 million, or nearly 27%, of the General Fund. Property taxes follow closely behind sales tax as a major source of revenue, contributing $68.9 million, or about 24%, of the General Fund. All other sources of revenue account for $7.1 million, or about 2.5%, of the General Fund.

-Blake Dixon

Overall, personnel services account for nearly 75% of Anaheim’s General Fund expenditures. The General Fund is chiefly concerned with funding Police and Fire. In fiscal year 2015/2016, Police and Fire accounted for $186.0 million, or about 65%, of the total expenditures of the General Fund. What Anaheim calls “Ensuring Quality of Life,” which includes expenditures on planning and building, community and economic development, community services, conventions, sports, and entertainment, accounted for $48.7 million, or about 17%, of the total expenditures of the General Fund. Public utilities and public works accounted for $23.1 million, or about 8.1%, of the total expenditures. Expenditures on city administration, including those allocated to the city council, city attorney, city clerk, and city treasurer, accounted for $18.1 million, or about 6.3% of the total expenditures of the General Fund. Supporting activities, including finance and human resources, comprised the remaining $10.1 million, or 3.5%, of the General Fund.

In 2014, the last year for which data is available, Anaheim spent a total of $53,280,969, roughly 20% of its general fund, on pension contributions alone. Even so, the city’s unfunded pension liability – the difference between the city’s obligations to its retirees and the assets it has to pay them – was $508 million, more than twice Anaheim’s 2014 revenue. In order to maintain long-term solvency, Anaheim still has a ways to go in reforming its compensation and pension systems, but it is currently moving in the wrong direction.

-David Schwartzman

Pension and compensation votes, November 2012

The California Public Employees’ Pension Reform Act, passed in 2012, allowing cities to cut public safety union pensions to 2.0% in contract negotiations. On a 4-1 vote, the Anaheim city councilcut firefighters’ pensions more modestly, from 3% to 2.7% of their highest annual salary per years worked Kris Murray, Harry Sidhu, Gail Eastman, and Lorri Galloway all voted for the deal, while Mayor Tom Tait opposed it. Supporters of the 2.7% deal predicted it would reduce firefighter payroll expenses by up to 7 percent. Tait looked to San Diego and San Jose, where officials reduced pensions much further and did a better job of relieving the burden on taxpayers.

-David Schwartzman

April 2013

Following its action on the firefighters contract in 2012, the city council voted 4-1 to approve a new police union contract, cutting pensions of new police officers from 3% to 2.7% of their highest annual salary per years worked. Kris Murray, Lucille Kring, Jordan Brandman and Gail Eastman voted for the deal, while Tom Tait again opposed the measure because he did not believe it went far enough to protect the solvency of the city. He wanted to lower it further, as the state of California allowed under the 2012 reform act. City officials said the new contract would save the city $1.6 million in the short-term.

-David Schwartzman

January 2016

The city council voted 4-1 to raise firefighter salaries by 10% by mid-2017, coupled with a 3% increase in firefighter contributions to pensions. Kris Murray, Lucille Kring, Jordan Brandman and James Vanderbilt voted for the deal, arguing that firefighters deserved a raise because they had foregone raises since 2009. Mayor Tom Tait opposed this measure because he said that Anaheim did not have the money for this increase, and voiced concern about how the pay raise would affect Anaheim’s $580 million unfunded pension liability.